Under ATAD2, in essence three types of rules are implemented to neutralise the tax effects of hybrid mismatches:

  • Denial of deduction: payments made by a corporate taxpayer may no longer be tax-deductible if and to the extent such payments, as a result of a hybrid mismatch arrangement, are not regarded as taxable income in the state of the recipient (deduction without inclusion; D/NI) or these payments (or expenses or losses) can be deducted twice (double deduction; DD). This rule is referred to as the “primary rule”. As an exception to this primary rule, deduction may in certain hybrid mismatch situations be allowed if and to the extent the deduction is set off against so-called dual inclusion income.
  • Inclusion of income: income of a corporate  taxpayer that would normally be exempt from corporate income tax or not be recognised, as a result of a hybrid mismatch arrangement, is included in the taxable income if the underlying payment was deductible in the state of the payer. This rule is referred to as the ”secondary rule”.
  • Taxation of reverse hybrid entities: reverse hybrid entities (transparent for corporate tax purposes in their own jurisdictions and non-transparent for tax purposes in the residence state(s) of the participants in the entity) will be subject to corporate income tax if incorporated, established or registered in a Member State. This rule is referred to as the ”reverse hybrid rule”.

The primary and secondary rules apply as from 1 January 2020 and the reverse hybrid rule applies as from 1 January 2022.

How we can help

The ATAD2 position of multinational groups needs to be assessed in view of tax years starting on or after 1 January 2020. Our team can assist you in assessing the ATAD2 implications for your structure. Please feel free to reach out to a member of our ATAD2 team with any questions you may have.

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